Dear readers of Matrix: I have spent the past decade complaining about issues relating to appraisal pressure and the inherent flaws in the lending industry that prevent appraisers from performing independent assessments of collateral for mortgage purposes. As a result, you may see an unusual number of posts on this topic in the coming weeks. The interesting thing is, and is evidenced by the problems of the mortgage and credit markets, most institutions didn’t get the concept that appraisals need to be reliable, not merely filled out forms. The issue affects nearly everyone within the real estate industry and consumers. I am giddy that action seems to be finally moving forward…Jonathan Miller
New York State Attorney General Cuomo had another press conference today covering a hot topic as of late, appraisal pressure.
Attorney General Andrew M. Cuomo today announced his office has sent Letters of Notice and Demand, providing notice of the issuance of Martin Act subpoenas and a demand for an Independent Examiner, to the nation’s two largest financiers of home mortgages, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Cuomo also announced that Fannie Mae and Freddie Mac have agreed to the demand to retain an Independent Examiner, subject to the Attorney General’s approval, to conduct a total review of all Washington Mutual (NYSE: WM) appraisals and mortgages purchased by the companies.
“The subject of the investigation is what they knew, when they knew it and what they did about it,” he said in an interview. He said his staff continues to study problems in the mortgage industry, including the role of investment banks, which also create mortgage-backed securities for sale to investors.
Here’s Cuomo’s letter to Fannie Mae and he name is “Mudd” (really!).
On Monday, the AG endorsed new federal legislation that will:
create new protections for consumers and investors and prohibit the improper coercion of appraisers to meet target appraisals.
A prior version of this bill died last year as one of the co-sponsors was indicted (is that irony or what?)
Fannie Mae is in an awkward position. They guaranteed mortgages submitted by Washington Mutual [WaMu] and therefore would have accepted underwriting performed on these mortgages, including appraisals submitted by WaMu.
Fannie Mae isn’t responsible for checking comps or reviewing appraisals, but they need to make sure that methods employed comply with guidelines, otherwise the lenders have to buy the loans back, as laid out in Fannie Mae’s “We Look Forward to Working With the New York State Attorney General” press release.
In other words, perhaps Fannie Mae could unwittingly pass mortgages with inflated appraisals to investors. Indirectly, they are not incentivised to be concerned because, as the press release says, the lender has to buy the loan back from Fannie Mae if there is a problem. Perhaps this is another element that contributed to the reluctance of investors to purchase mortgage paper.
Of course Jim Cramer weighs in and claims that the AG will shut down the market for houses. In other words, lets not worry about fixing the problem with bloated valuations and their impact on the assessment of risk for investors, because the status quo worked soooo well.